UPDATE 3-Fed's Dudley sounds alarm over Puerto Rico's high debt load

Reuters Staff

3 Min Read

(Adds yields on Puerto Rico bonds)

SAN JUAN, June 24 (Reuters) - New York Federal Reserve Bank President William Dudley warned Puerto Rico about its growing debt load and questioned if the island can sustain its high level of borrowing in remarks delivered to an accounting group on Tuesday.

“Persistent deficits in the Commonwealth’s fiscal accounts as well as mounting deficits in the operation of the several major public corporations have substantially raised the island’s overall level of public debt and led to serious concerns about whether the island’s fiscal position is sustainable,” he said.

He added the bank is working on a report to “examine the factors leading to the sizeable buildup of public debt” and “its future trend.”

During questions after the speech, Dudley declined to speculate on whether Puerto Rico would default, but said “the next three to six months are going to be very, very important.”

He also would not comment on restructuring. Some believe the island cannot turn things around without restructuring $70 billion in outstanding debt - a move akin to filing for bankruptcy - and in the spring Puerto Rico hired Wall Street restructuring consultants.

“The time is right to make some of the tough decisions,” he said. “You can be in a much better place even six months or a year from now.”

Earlier this year Puerto Rico sold $3.5 billion bonds in the largest junk deal ever in the U.S. municipal bond market

Late Tuesday afternoon, after Dudley’s remarks, yields on the bonds spiked to a record high of 9.731 percent, or 84.625 cents on the dollar, in a large sale. By the end of the day, yields hovered closer to 9.667 percent, or 85.125 cents on the dollar, as customers bought up large lots of the debt. Yields move inversely to price.

The yields have risen over the last week, partly on concerns the Government Development Bank could soon have to provide liquidity to the territory’s power authority, some of whose lines of credits are expiring. Two rating agencies have downgraded the authority on worries about its liquidity.

Puerto Rico Governor Alejandro Garcia Padilla recently signed an energy law that Dudley said could help attract business. But he suggested Puerto Rico attempt to strengthen the financial performance of its agencies, called public corporations.

“A major difference between Puerto Rico’s balance sheet and those of the states is the presence of large, heavily indebted, corporate-like entities that continue to lose money and increase borrowing,” he said. “For any financial reform agenda to be successful, it must confront this issue head on.”

He also suggested lowering barriers to job creation, reforming the tax system and improving financial reporting. He said the territory could benefit from adopting financial practices of states.

Last week, Padilla signed a law declaring a fiscal emergency and the territory’s budget is now in the legislature. (Reporting By Reuters in San Juan, Additional reporting and writing by Lisa Lambert in Washington; Editing by Meredith Mazzilli)